Global Diversity

All experienced investors agree on the wisdom of diversification -- hedging your bets. This is an important step on the Money Wisdom Way. As a general rule of thumb in investing you are advised not to put more than 5% of your portfolio into the hands of any one company. So for instance, with a portfolio of 1 Million, the average investment would be around $50,000 in 20 different stocks, funds or bonds. Diversity can also come from a few mutual funds where each fund many have dozens, or even hundreds of companies. Diversity also applies to the types of companies you invest in, their size, even the geographical areas. So you are advised to diversify according to industries, market capitalization, and location. Then if one company, or industry, or even country collapses, you will be protected. Your other investments will provide a buffer. Conversely, with diversity you can catch more than one positive wave. Sometimes the small caps profit more, sometimes the large. Diversity also applies to the types of investments you make; for instance: stocks, bonds, mutual funds, cash, jewelry, real estate (like for instance a home), collections, or personal businesses. Only a fool puts all of his money into the stock market! The fools' fool puts it all into one company.

The amount of diversification depends upon your individual interests and risk tolerances. For instance, if you are comfortable with high risks, and can afford to lose most (or all) of your stock investments, you may not diversify as much. For instance, a high risk taker, who also happens to have most of his life and interests tied up in technology, might invest all of his money in Internet stocks. He may make a huge fortune that way (depending on his exit luck!), or he may lose it all. Another person with less risk tolerance, but the same kind of limited, monophonic type of life, might invest in tech bonds and mutual funds. His risks will be much less, but so will his upside potential. Another high risk type of investor, with many diverse interests, might have a portfolio of stock from all of the sectors that he is interested in and wants to grow. In other words, your personal vision has a lot to do with the amount and type of your diversification.

Even if your vision of the world is not yet global, you owe it to yourself to add some geographical diversity to your portfolio. This can come from direct investments in different stock markets around the world, but this is difficult, complex and sometimes very risky. (Do you trust the Russian stock exchange?) It is much easier and safer to invest in foreign companies that have stocks listed on U.S. exchanges (called American Depositary Receipt companies, or ADR). This allows you to invest in a foreign company, and still receive the assurances and protection of U.S. markets and investment laws. ADR's provide a good way to travel the world with all the comforts of home. For more information on ADR companies, and global investment analysis, see J.P. Morgan's web site at ADR.com. For basic information on exactly what an ADR is, see the Global Investor web site, where you will also find a list of ADRs by foreign country. Another good approach to global diversity is to look for U.S. companies with extensive international activities and global markets. For instance, Coke (KO) is now sold everywhere in the world, and no matter what you might think about the "quality" of McDonalds (MCD) and its hamburgers, so far, no two countries that have one have ever gone war!

Global diversity also allows you to profit when another sector of the world economy is surging ahead. This is particularly helpful when our own economy is in a down cycle. Foreign investment can also be a powerful way to impact the conduct of foreign countries you may find unethical. For instance, negative screening, or boycott, worked quite successfully in bringing down the oppressive apartite regime in South Africa. Now investing in South African companies, or U.S. companies with a big presence in South Africa, works in a positive way to help this new democracy. Upset about the repressive regime in China, want to free Tibet? Ironically the best way to do that may be by investing in select Chinese corporations. For instance, the ADR company APT Satellite (ATS) based in Hong Kong, whose largest shareholder is the People's Republic of China, provides commercial satellite services to China. What kind of effect do you think CNN, or worse, MTV, is having on the Chinese people? How about the long term "subliminally subversive" effect of the Internet on Chinese communism, and an Internet company like China.com (CHINA)?